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Avoid These Stocks at All Costs

Here are three stocks our analysts think you should stay away from.

There are some stocks that look like great buys right now, and others that are a little expensive but still make great long-term investments. And then there are some stocks that don't fit into either category -- the stocks that we wouldn't buy right now, no matter what. We asked three of our analysts for the stocks they want investors to stay away from, and here's what they had to say.

Matt Frankel: One stock I would definitely avoid at all costs is Fannie Mae(NASDAQOTH:FNMA), as well as its counterpart, Freddie Mac(NASDAQOTH:FMCC). Even though several hedge fund giants are making big bets in these stocks, chances are very good not only that common shareholders will never see huge profits, but also that they'll get wiped out entirely.

Now, before I get a bunch of negative comments, bear in mind that I've written several articles about the Fannie and Freddie drama, and that I wholeheartedly believe that shareholders deserve a share of the agencies' profits.

And it may happen eventually. There's currently a legal battle to challenge the current arrangement in which the Treasury gets 100% of Fannie and Freddie's profits and shareholders get nothing. If the courts rule in shareholders' favor, the stocks could easily be worth 10 times their current value of around $2.80 per share.

However, it's still a very unlikely scenario. One judge has already ruled against the shareholders and tossed out several of the lawsuits, and there's constant talk in Congress of ways to get rid of Fannie and Freddie altogether.

So although I think Fannie and Freddie's shareholders should get paid, there's a long, uphill battle before that can happen. Buying these stocks is like buying a lottery ticket, and just like the lottery, you shouldn't put in money you can't afford to lose.

Dan Caplinger: One area that's seen big challenges lately is Brazil, with a plunging currency and high interest rates threatening an economy that's already taken a hit from the falling commodities markets. Now that oil prices have fallen along with other key natural resources, the underpinnings of the South American giant's boom have weakened dramatically, and that has sent banks such as Banco Bradesco(NYSE: BBD) to their lowest levels since the financial crisis in 2009.

Admittedly, Banco Bradesco looks like an attractive value stock, with an earnings multiple of 10 and a dividend yield of 9%. But the bank is under fire in U.S. court for selling bonds of oil giant Petroleo Brasileiro to American investors, as Petrobras has found itself in the middle of a corruption scandal that allegedly involves politicians as high up in the government as Brazilian President Dilma Rousseff. With Bradesco having played a key role in several Petrobras bond issues, the bank tried earlier this month to convince the court that it didn't know anything about the scandal.

In the long run, Banco Bradesco should be able to survive the Brazilian slowdown and potentially even thrive. For now, though, the Brazilian bank could see further downside, especially as long as questions about emerging markets persist.

Jordan Wathen: When it comes to high-dividend stocks, it pays to do your due diligence. Prospect Capital Corporation(NASDAQ:PSEC) is one such stock. It offers a beefy 12% dividend yield but fails a basic due-diligence test.

Although the stock is certifiably cheap -- it trades for about 8 times earnings and a 15% discount to book value -- I still think it's a stock to avoid all together. In recent months, the company's accounting has come under serious scrutiny. Some of its best assets are probably mismarked, inflating its reported book value. It recently marked one underperforming loan at 86% of principal value, when its competitors, who own a portion of the exact same loan, mark their investment at an average of 45% of principal.

Many investors avoid financial stocks for this very reason: It's hard to know if a financial company is properly valuing its assets on balance sheet. When there is clear evidence that a financial company is aggressive in how it reports the value of its loans, I think it's an obvious sign to avoid it at all costs.

Author

Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!
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